The mainland's two largest banks yesterday posted bumper profits for the first quarter as rising interest rates and robust loan demand boosted net interest income.

Industrial and Commercial Bank of China, the world's largest lender by market value, said first-quarter net earnings rose 29 per cent from a year ago to 53.79 billion yuan (HK$64 billion). Meanwhile, China Construction Bank, the nation's second largest by asset, said its net income rose 34 per cent to 47.2 billion yuan.

The handsome profits, slightly better than analysts' expectations, resulted from expanded net interest margins after the central bank raised interest rates four times since last October and improved pricing power of lenders as strong demand was met with a restrained loan budget.

'Listed banks' profits are likely to grow 25 per cent for the full year from 2010,' said Mao Junhua, an analyst with China International Capital Corp (CICC). 'Future interest rate hikes are likely to be asymmetric, which would negatively influence net earnings.'

Policymakers are under pressure to raise deposit rates as inflation hit a 32-month high of 5.4 per cent last month. But at the same time, Beijing would not like to increase loan rates aggressively as that would hurt economic growth. As a result, economists widely expect asymmetric interest rate rises in coming months.

ICBC said net interest income grew nearly 25 per cent year on year to 85.38 billion yuan in the first quarter, while net fee and commission income surged 42 per cent to 25.93 billion yuan.

The bank said it maintained a 'moderate growth' by extending 210.52 billion yuan of new loans in the quarter, up 3.39 per cent from a year earlier. Growth of loans to real estate developers was 10.3 percentage points lower than a year ago, it said.

ICBC's capital adequacy ratio stood at 11.8 per cent, meeting the regulatory requirement. China Construction Bank's capital adequacy ratio was 12.45 per cent as of the end of March while total assets stood at 11.3 trillion yuan and the non- performing loan ratio was 1.09 per cent, the lender said in a statement to the Hong Kong stock exchange.

Quality of loans to the real estate sector, target of the government's cooling measures, and those to local-government financial vehicles are among top concerns of analysts.

ICBC's non-performing loan ratio was down 0.08 percentage point from December to 1 per cent at the end of March while the balance of bad loans decreased by 2.47 billion yuan over the quarter to 70.77 billion yuan.

CICC analysts estimate combined bad loans of listed banks, excluding Agricultural Bank of China, would surge 32 per cent year on year this year and 39 per cent next year, factoring in full risks of loans to local-government financing vehicles. But analysts said matters may indeed turn out to be better than their estimate.

The financing vehicles of local governments attracted a significant portion of the 17.6 trillion yuan of the new loans made by mainland banks in 2009 and last year as the lenders helped with the nation's financial stimulus. But the solvency of some of the local governments has become a source of concern for regulators.

Fitch Ratings this month downgraded the mainland's local-currency issuer rating to reflect concerns over the scale of sovereign contingent liabilities and risks to macro-financial stability arising from the rapid pace of bank lending.

In the money

ICBC sees bumper harvest on higher interest rates

The world's largest lender by market value posts a 29 per cent rise in net profit, in yuan, of this much: 53b yuan